The EDGE of a trader
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  1. #1
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    The EDGE of a trader

    Hi traders! Many traders want to pick a profitable strategy, but not too many traders ask a question - "does this strategy have an EDGE?". Ability to earn money in a short-term time perspective is not an edge itself, it's just a correspondence of your strategy and current market conditions.

    The best way to understand the concept of EDGE it is to remember how casinos make their profit. They generate significant deal flow from their clients - they force them to make more and more bets and eventually, casino earns money and its edge can be explained in a few words: limited payoff per stake and limited stake size. That's it. That's the edge. All they have is to generate enough turnover to realize that edge.

    Edge can be formulated in a very simple way - for example, it can be ability of the market to liquidate quickly when it has exceeding inventory, or it can be ability of the trend to keep going in the dominant direction rather than reverse. It should be very simple, it's not a strategy, it's a core principle that allows you to beat the average. All you have to do is to have more situations that provide you your edge - in other words, more markets and more setups that have those profitable (for your trading style) inefficencies.

    Why do you need decent turnover to realize your edge? What about "trade less to earn more" principle? Well, the fact is that overall predictibility of the market is relatively low, and even if you have "A"-class conditions for your trade, you have no guarantees of profitable outcome. The very next trade doesn't make sence in terms of final outcome. Next 100 or 1000 trades will definitely make sence.
    So, there are core principles that should be respected by trader:

    1. Trading is a marathon and final result can be calulated only on a series of trades.
    2. Edge or your core trading idea should be simple. You should have opportunity to find it on any market. The best trading edge is that relies on fundamental unchanged behavior of market participants (say, trendiness).
    3. To realize your edge, you want to have more what works. More markets and more good setups.

    For example, I formulate my edge in the following words:
    I use ability of the strong trend to have better odds of continuation, and trade against couter-trend short-term inventory. It means that in my trading first I have to define a trend, then to define exact entry point - for entry I tend to seek for exceeding inventory of counter-trend traders. Trend creates market conditions that will help price action to go further, entry point will provide me good timing for my trade and will help me to reduce risk.
    So, you see that trend plays sigificant part in my trading, that's why I want to have more currency pairs (and other instruments as CFDs) for better trade selection. Also, I like to trade liquid markets (mostly currencies), because overbought and oversold conditions occur pretty frequently on these markets. Combining trendiness with short-term market logic helps me to move forward in my trading.

    How would you formulate YOUR edge?

    Not allowed!
    Last edited by Value trader; 03-26-2014 at 07:40 PM.

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